IBC | Corporate Guarantee Qualifies As 'Financial Debt' : Supreme Court

The Supreme Court has held that a corporate guarantee furnished by a company to secure another company's borrowing, backed by arrangements such as hypothecation, constitutes a “financial debt” under the Insolvency and Bankruptcy Code, 2016. A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe considered a dispute in which an SBI-led consortium sought recognition of its claims in the CIRP initiated against Reliance Infratel Ltd. (RITL)-Corporate Debtor. The consortium contended that since RITL had executed corporate guarantees in its favour for loan facilities extended to group entities such as Reliance Communications (RCOM) and Reliance Telecom, the declaration of RITL's account as an NPA entitled the banks to invoke those guarantees and submit their claims in the insolvency proceedings against RITL. The NCLT and NCLAT refused to allow the SBI-led Consortium claims against the RITL, leading to an appeal before the Supreme Court. The issue before the Court was whether the corporate guarantees furnished by RITL in favour of the appellant banks, to secure loans extended to its group companies against the consideration for the time value of money, could be treated as “financial debt” and thereby eligible to be included in the claims under the insolvency proceedings initiated against RITL. Setting aside the impugned decision, the judgment authored by Justice Aradhe answered in the positive, holding that “a liability arising from the corporate guarantee squarely falls within the ambit of financial debt as defined under Section 5(8) of the Code.” “It is well settled legal proposition that a guarantor incurs a coextensive liability with that of a principal borrower and such liability is enforceable in law.…the corporate guarantees executed by the corporate debtor constitute “financial debt” within the meaning of Section 5(8) of the Code. The appellants are entitled to be recognized as financial creditors.”, the court held. The Court clarified that guarantees issued for loans disbursed against consideration for time value of money satisfy the requirements of Section 5(8) of the IBC. (See China Development Bank v. Doha Bank Q.P.S.C. & Ors., 2024 LiveLaw (SC) 1029)Accordingly, the appeal was allowed, recognizing the Appellant-bank as the financial creditor for inclusion of their claims against the RITL in CIRP. Cause Title: STATE BANK OF INDIA & ORS. VERSUS DOHA BANK Q.P.S.C. & ANR.Citation : 2026 LiveLaw (SC) 434Click here to download judgmentAppearance: For Appellant(s) : Mr. N. Venkataraman, A.S.G. Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Shubhra Kapur, Adv. Ms. Santha Smruthi, Adv. Mr. Anuraj Mishra, Adv. For Respondent(s) :Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Prashanto Chandra Sen, Sr. Adv. M/S. Juris Corp., AOR Mr. Jayesh H, Adv. Ms. Jinal Shah, Adv. Mr. Dhruv Malik, Adv. Ms. Palak Nenwani, Adv. Mr. Ronit Chopra, Adv. Mr. Sayantan Chandra, Adv. Ms. Rajlakshmi Singh, Adv. Ms. Vanisha Mehta, Adv. Mr. Gopal Jain, Sr. Adv. Mr. S. S. Shroff, AOR Mr. Vaijayant Paliwal, Adv. Ms. Charu Bansal, Adv. Ms. Shruti Poddar, Adv. Mr. Neeraj Kishan Kaul, Sr. Adv. Mr. Rajendra Barot, Adv. Mr. Nilang Desai, Adv. Mr. Abhijnan Jha, AOR Ms. Saloni Thakker, Adv. Ms. Nafisa Khandeparkar, Adv. Mr. Bharat Makkar, Adv. Mr. Pranav Tomar, Adv. Mr. Harshil Goda, Adv. Mr. Narender Hooda, Sr. Adv. Mr. Naman Saraswat, Adv. Mr. Tavinder Sidhu, Adv. Mr. Vikas Soni, Adv. Mr. Kanav Singhal, Adv. Ms. Kamini Sharma, Adv. M/S. M. V. Kini & Associates, AOR

IBC | Corporate Guarantee Qualifies As 'Financial Debt' : Supreme Court

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IBC | Corporate Guarantee Qualifies As 'Financial Debt' : Supreme Court

Yash Mittal

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